How Does a Car Title Loan Work?

by Laura Agadoni

If you own a car, you might be able to get a title loan.

If times are tough and you need emergency cash, a car title loan can be one way to go. A car title loan -- considered a predatory loan by the Consumer Federation of America and the Center for Responsible Lending -- is better than having your legs broken for failure to pay a debt. But if you decide to take out one of these loans, understand the risks. Many people lose their car titles because of them.

What It Is

Car title loans are popular with people who have poor credit but own the titles to their cars. The lender assesses your car and lets you borrow a percentage of the value, generally 25 percent to 50 percent. Typically, no checks of credit, background or employment are done; the lender just asks to hold onto the title until you pay back the loan. You might also need to hand over a set of keys. This makes it easier for the lender to repossess the car if you don’t pay back the loan on time.

Interest Rates

Because title loans are marketed to people with poor credit, the interest rates are usually much higher than the rates on standard bank or credit union loans or credit cards. A typical car title loan could be 25 percent, for example. But don’t let that number fool you — it might mean 25 percent for 30 days. The annual percentage rate for that loan would be 300 percent.

Roll Over

Many people take out a title loan with the intention of paying it back the next month, but when the time comes, they can’t. The lender typically allows borrowers to roll over the loan and pay only the interest. Lenders typically allow borrowers to roll over the loan eight times before they insist on full payment. If the borrower doesn’t come up with the cash, the lender takes the car. Even worse, if the lender sells the car at auction for less than what you owe, you lose your car and you still owe the lender the balance.

State Restrictions

State laws vary on allowing title loans, and on any restrictions. As of August 2012, 22 states did not allow title lending. Eight states allowed it, but only at lower rates. Sixteen states allowed title lending with three-digit interest rates, and four states allowed title lending through a loophole in the law.

Alternatives

Try getting money a different way if you don’t think you can pay back a title loan in 30 days. The risk of losing your car is too great. Some alternatives: Try to work out a payment plan with your creditors, ask your boss for a pay advance, or take a cash advance on your credit card.